More dovish Fed sees Bank Indonesia cut rates again

JAKARTA - As expected, Bank Indonesia (BI) today cut its main policy rate by 25 basis points to 7.00% in an effort to spur more momentum for growth. The lending facility rate and deposit facility rate were each cut by the same amount, and the primary reserve requirement ratio was cut by 100 basis points to 6.5%.

Supporting growth is the key driver behind the cut, according to the French investment bank, Natixis, which says that, notwithstanding a pick-up in growth in Q4 up to 5.0% y/y from 4.7% in Q3, the pace of expansion is still well below the 5.8% average recorded over the past decade.

“Furthermore, inflation is longer a constraint for BI (just 4.1% y/y in January and core inflation on a downward trend, easing to 3.6%),” Natixis adds.

“The constraint for the BI is, of course, financial stability, as in particular the impact that a cheaper rupiah can have on the financing of an increasingly large current account and the cost of serving foreign currency debt, which is particularly large for some sectors, especially energy and materials.

“The FED recently moving to a more dovish stance has offered BI a window of opportunity to cut rates since there is less of a likelihood of a weakening rupiah in this context.” www.natixis.com (ATI).